Excess liquidity, cryptocurrency returns, and the moderating role of economic policy uncertainty

This study extends Acharya and Naqvi’s (2012) theory of liquidity-driven risk-taking to digital asset markets by examining the relationship between U.S. and Chinese excess-liquidity conditions and cryptocurrency returns. Using monthly panel data for ten major cryptocurrencies from 2019 to 2024, and defining excess liquidity and economic policy uncertainty (EPU) as binary state indicators, the baseline results show that periods of U.S. excess liquidity are associated with a 12.1 percentage‐point increase in average monthly cryptocurrency returns. This liquidity-return premium is reduced by approximately 54% during episodes of rising U.S. EPU. Chinese excess-liquidity regimes are associated with a 9.3 percentage‐point increase in monthly returns, but this positive association is more than offset under rising Chinese policy uncertainty, as indicated by a −13.8 percentage‐point interaction effect. These findings are consistent with the interpretation that surplus-liquidity conditions coincide with stronger cryptocurrency returns, in line with risk-taking and stablecoin-based arbitrage channels, whereas rising-EPU regimes weaken the liquidity-return relationship by increasing risk aversion and reducing arbitrage efficiency. The results highlight a macro-financial channel through which liquidity conditions are linked to digital asset markets and suggest that regulators should monitor stablecoin issuance, leverage, funding conditions, and liquidity-driven speculative pressure in the crypto market.